Insolvency law: Government mulls easing related-party rule

The government is considering relaxing the ‘related party’ criterion under the Insolvency and Bankruptcy Code (IBC) to make it less restrictive and give conditional approval to certain relatives of defaulting promoters to bid for stressed assets. Sources told FE that through changes in section 29A of the IBC people related to defaulters by blood or other familial relationships could be declared only “deemed to be related” and given a chance to rebut that assumption on grounds like “we have not worked together in any business in the last 3-5 years and so on” with supportive evidence. Currently, various related parties, including relatives of individuals who have run a stressed company, are barred from bidding.

Analysts have argued that a Mukesh Ambani shouldn’t be barred from bidding for, say, Alok Industries, even if Anil Ambani is declared a defaulter or vice versa. Earlier this year, Numetal, a contender for Essar Steel, had claimed that its rival bidder ArcelorMittal was ineligible, as firms belonging to brothers of the latter’s promoter LN Mittal allegedly defaulted on loan repayments despite Mittal not having business ties with these brothers. Numetal’s bid for Essar Steel too was held to be ineligible on the grounds that Rewant Ruia who is associated with the company, is the son of Ravi Ruia, a promoter of Essar Steel.

The idea is not to deny a genuine businessman, who doesn’t have any financial dealing with a defaulter but is related to him by just birth or factors beyond his control, from bidding for stressed assets. The relaxation will expand the universe of potential bidders and help maximise the value of stressed assets. The changes, sources said, could be brought in as amendments to IBC in the (interim) Budget session of Parliament.

Through an ordinance in June, the government defined “relatives” and “related party”and made their disqualification for bidding more explicit. It was built into the IBC via amendments in August. It defined “related party” in relation to the individual (like promoters or others who have run a stressed firm) as one who is a relative of the individual concerned or his spouse; one who is a partner at a partnership firm in which the individual concerned is associated with; a trustee of a trust in which the beneficiary of the trust includes the individual; a private company in which the individual is a director and holds with his relatives over 2% of share capital, among others.

Under Section 24-A, “relatives” was defined as anyone who is related to another, if they are members of a Hindu undivided family or if they are husband and wife. Relatives will also include father and stepfather; mother and step-mother; son and stepson; son’s wife; daughter and her husband; brother and step brother; and sister and stepsister.

Some analysts have said the scope of the definition is too broad to disqualify many people unless more clarity is brought in. For instance, it includes “a person on whose advice, directions or instructions, the individual is accustomed to act” in the definition of “related party”. Insolvency expert Sumant Batra said, “There is a need to revisit the entire 29-A. The government needs to come up with a formula which will distinguish a good promoter from a bad promoter.”

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